Saturday, June 16, 2007

Blackstone IPO: Private Equity Pirates Come Full Circle

If you’re looking for an actual date you can circle on your calendar for the day when the global bubble officially reaches ludicrous proportions, you may as well go ahead and circle June 25 in bright pink ink. It’s as good a day as any. And unless the mission is aborted by the investment banks, June 25 is the day the Pirate Equity big shots at Blackstone will IPO.

Blackstone hopes to raise about US $4.5 billion in the offering. And if it’s successful, the rumour is that other pirate firms like Texas Pacific, the Carlyle Group, Apollo, and perhaps even Kohlberg, Kravis, Roberts will not be far behind. As Bill Bonner has shown in recent days, if the pirates float to the public successfully, the giant fraud will have come full circle, with the super-rich insiders getting rich by selling shares to the public (not investing in businesses or building value.)

Ask yourself this: if money is cheap (and all signs are that borrowing costs are still pretty low) why does a private equity firm need to raise money in a public offering? We can think of only one reason. The only thing better than borrowing money to do a deal is doing a deal without any money at all!That’s right. The creation of shares that trade at a premium to some murky book value give the pirates a whole new kind of leverage. It gives them a whole new kind of currency and the ability to deal in exchange for stock, rather than borrowed cash.

As we said, it’s not exactly like the cost of capital is going through the roof these days. The pirates could keep loading up with leverage to do deals. But it may be that after the first frenzy in buy-outs, the quality of assets that generate enough regular cash flow to finance high debt loads has declined. It also may be that the pirates have seen the signs of higher rates in the recent movement in the bond markets. Or it just may be that a con man can’t resist taking every last quarter that he can get.

Whatever the motives, the rush of the pirates onto the public markets is an irony beyond our Friday vocabulary. So we’ll leave it at that and remind you that June 25 is, at the very least, a symbolic day. We should add that timing the end of a psychological phenomenon is itself a loser’s game. This could go on for a while.